While the survey did not show a marked decline in credit availability as some might have feared, the shift nonetheless reflects a trend that we think is likely to weigh on US economic growth. We continue to believe that recession risks are elevated in the US as growth slows further.
Tighter credit standards seen across the board. In addition to tighter credit conditions for large- and mid-sized firms, the survey also showed more stringent lending for small businesses. A net 46.7% of banks said credit terms were stiffer now for small businesses versus 43.8% in the January survey. Banks added that firms of all sizes were showing less demand for credit than three months earlier, while consumer demand for credit card, automobile, and other forms of household credit remained soft. This combination should further weigh on growth, in our view.
US banking problems remain a concern. The Fed also published its Financial Stability Report this week, with the central bank showing concerns that “the economic outlook, credit quality, and funding liquidity could lead banks and other financial institutions to further contract the credit supply to the economy.” While we still don’t expect a systemic banking crisis similar to 2007, strains on more vulnerable institutions could remain a source of market volatility. The KBW Bank Index is now over 30% lower since March.
Corporate profit growth to come under pressure. While first quarter earnings have topped expectations so far, we believe the outlook for corporate profits remains challenging, amid negative trends in technology spending and more conservative rhetoric from managements. The Fed may have hinted that an end to tightening could be in sight, but the lagged effect of 500 basis points of rate hikes over the past 14 months is continuing to feed through to the economy.
So, we continue to prefer bonds to equities in our global strategy. Within fixed income, we favor high grade, investment grade, and sustainable bonds—as investors position with a peak in rates and a slowdown in growth ahead.
Main contributors - Mark Haefele, Daisy Tseng, Giovanni Staunovo, Wayne Gordon, Jon Gordon
Content is a product of the Chief Investment Office (CIO).
Original report - Tighter credit conditions add to US growth headwinds, 10 May 2023.